Francis Manufacturing Limited Accounting Report
Executive summary
Francis manufacturing limited has been divided into two divisions. Eastern division which manufactures Protea product while Western manufacturers Primrose. The president complained that the eastern division did not do well due to massive losses generated in 2016 relative to the previous year.
The sales department manager received a commission based on total sales. Such a kind of motivation made many unhappy. The sales were made in two markets: The domestic and foreign markets. Protea market faced stiff competition which changed the pricing strategy of Eastern division to survive the stiff competition.
This paper seeks to analyze 2016 operating results and recommend any changes, Carry out detailed analysis and explanation of the Eastern division’s loss, recommend if any part of the company should be discontinued to improve corporate profit and do a general assessment on the current systems and structures. Don't use plagiarised sources.Get your custom essay just from $11/page
- Analyze 2016 operating results
| FRANCIS MANUFACTURING LIMITED | |||
| OPERATING STATEMENT VERTICAL ANALYSIS | |||
| FOR THE YEAR ENDED DEC 2016 | |||
| EASTERN($) | WESTERN($) | TOTAL($) | |
| SALES | 100% | 100% | 100% |
| manufacturing cost of sales | |||
| variable processing cost | 52.40% | 40.31% | 46.00% |
| fixed overhead cost | 17.47% | 18.09% | 17.80% |
| Total manufacturing cost of sales | 69.87% | 58.40% | 63.79% |
| GROSS PROFIT | 30.13% | 41.60% | 36.21% |
| variable selling and administration | 18.34% | 17.18% | 17.73% |
| fixed selling expenses | 13.34% | 7.80% | 10.40% |
| TOTAL SELLING AND ADMIN | 31.68% | 24.98% | 28.13% |
| divisional profit/loss | -1.55% | 16.62% | 8.08% |
| head office admin | 0.00% | 0.00% | 4.11% |
| net income before taxes | 0.00% | 0.00% | 3.97% |
| investment base | 52.40% | 82.69% | 68.45% |
| return on investment | 0.00% | 0.00% | 0.00% |
Vertical analysis
The vertical analysis report outlines each item in the operating statement as a percentage of the total sales. It aims at bringing an understanding of the profitability arising from each line of production. Further, we can read how much revenue is generated from the functional unit of the company.
Manufacturing costs
Variable cost
Eastern division’s Variable costs add up to 52.4% of the total sales. This percentage is higher than the Western’s variable cost, which is at 40.31% incurred during production.
Fixed costs
Eastern division has a percentage of 17.47%, and western divisional add up to 18.09% of the total divisional sales. Eastern has lower fixed costs relative to western division.
Gross profit
The western division has 41.6% gross profit, while Eastern has 30.13% as a percentage of sales. The profitability arising from activities related to sales gives a clear picture that western division is more profitable than eastern.
Variable selling and administration
Western reports a lower percentage of sale and administration at 17.18% than eastern which has a high percentage of 18.34%
Fixed selling expenses
Eastern division has a higher fixed selling expense of 13.34% than western, which has a 7.80% percentage of selling expenditures as a percentage of total divisional sales.
Divisional profit or loss
Eastern recorded a loss of 1.55% as a percentage of sales while western reported a profit of 16.62%.
Return on investment
| Investment base…………………………………….. Return on investment……………………………. | $450,000 (3.0)% | $800,000 20.1% | $1,250,000 5.5% |
Return on investment in eastern is relatively lower than western division Eastern record a return on investment of 3.0 % and western had 20.1%. This means the total returns in both divisions are higher than the cost of investments.
- Recommendations regarding future operations
Quantitative analysis
Generally, Francis limited seems to be doing well. Western division is recording huge profits as a result of sales. The profitability of Eastern is wanting. From the analysis, Eastern has a higher variable cost. The company needs to make readjustments to the technology and the price of the raw materials used to manufacture Protea. The expenses in both divisions are adding to the little profits generated. The company needs to work on methods to reduce the amount of expenses incurred during selling and administration
Qualitative analysis
From the operating data analysis, the company is making average profits. The sales of both divisions are not right. To improve, the company needs to intensify market promotions and advertisements to recapture lost markets. The company also may work on advertisement and sales promotions to help escalate sales volume, translating to higher profits.
- Detailed analysis and explanations of the eastern divisions reported the loss
| FRANCIS LIMITED | |||
| OPERATING DATA | |||
| FOR THE YEAR ENDED DEC 2016 | |||
| EASTERN | TOTAL COST | DEVIATION | |
| UNIT SALES | |||
| domestic | 30,000 | ||
| foreign | 15,000 | ||
| TOTAL | 45,000 | ||
| SALES PER UNIT | |||
| domestic | $ 21.50 | $ 645,000 | |
| foreign | $ 14.25 | $ 213,750 | |
| TOTAL SALES | $ 858,750 | $ – | |
| variable manufacturing cost per unit | $ 10.00 | $ 450,000 | $ – |
| variable selling and administration | |||
| domestic | $ 3.00 | $ 90,000 | |
| foreign | $ 4.00 | $ 60,000 | |
| TOTAL VAR. SELLING AND ADMIN | $ 150,000 | $ (7,500) | |
| fixed manufacturing costs | $ 150,000 | $ 150,000 | $ – |
| fixed selling cost | |||
The Eastern division selling Protea did not do well in the year 2016. The considerable loss was attributed to
The decrease in prices in the foreign market
Due to rising competition in the foreign markets, the company decides to reduce the prices to $14.25. The reduction in prices led to little profits generated in the foreign market relative to western division. The company should change the pricing strategy from the penetration strategy to the psychological and economical prices close to its competitors.
Poor marketing strategy and promotions
Despite that prices in the foreign market were high the company did not allocate funds for marketing and promotions for products to win the market. Building the brand name and quality in the foreign market should have been a priority to the marketing department in order to improve sales.
Poor remuneration of sales manager
The company seems to be lacking the compensation strategies to its employees. The managers are complaining of the bonuses which are set too high to achieve. Further, the sales department managers are paid based on the sales which are making them so unhappy. This has added to the poor sales in the eastern division since the manager clarifies that they have no control over the sales. Also, No funds have been allocated to the basic salaries of salespersons. The human resource department should be at the forefront of motivating its employees towards doing the best for the company concerning sales.
Lack of better technology to reduce expenses
Technology determines whether the machinery used is capital or labor-intensive. Capital-intensive will require much capital for processing, and labor-intensive will increase the number of employees. The company is experiencing unusually high expenses relating to processing. The high processing costs have accumulated cost reduced the aggregate profits.
Fraud
Eastern division seems to be lacking an account of excess $7500 from variable selling and administration expenses. This could be attributed to theft or fraud in the departments
- Recommend if any part should be discontinued to improve corporate profit
Francis manufacturing limited has been doing well over the years, the western division is at the verge of performing well. The corporate is facing minor issues concerning the processing department, which has accumulated huge costs.
The processing unit should change the technology and machinery used to save the cost. The marketing department has been slow to react to the market. The strategies are not responding to the current state; hence the department should reconsider changing the marketing mix and strategy. The company should not scrap off any unit but change the strategy in response to the market dynamics.
- The general assessment of current systems and structures in place
Pricing strategy
Management of Francis manufacturing limited implemented the pricing strategy that involved using standard pricing with an addition of 75% to the production cost. Facing competition in the foreign market, the marketing department implemented the economical pricing, which lowered prices below that of the competitors to win a market share. This was a bold move to gain profits despite the stiff competition.
Motivation strategy
The company has not allocated any funds for the motivation of its employees. The salesperson has no pertaining commission amount of sales per month. Motivation to loyal customer has not rooted within the organization. Currently, customer service is not sufficient. The sales department managers are paid on commission based on the total sales, which are insufficient.
Performance strategy
The company’s main objective is to improve profitability through building customer base hence improving sales. The minimization of cost is another performance strategy of the company. The management is striving to make much out the capital employed.
Evaluation strategy
Monitoring the return on investment helps in noting the profits from each investment employed. The company measures the percentage returns from each investment. The results are then analyzed based on the standard performance from previous years.
Conclusion
In summary, the financial statement analysis has revealed the missing link and details explanation of the factors that should be considered for the success of the company. Francis manufacturing company can lead in the market despite stiff competition; this comes at the price of investing more in the sales department to boost the brans and reputation. The motivation of the employees is inevitable. For a company to flourish and improve in performance, the people marketing the product should feel and get attached to the product they are selling if discouraged,the company is on the verge of failing.